CoPS/IMPACT Working Paper Number OP-86

Title: How Does the Share of Imports Change During Structural Adjustment?

Author: Alan A. Powell

Abstract

Estimating the price responsiveness of market shares during a period of structural
transition requires a distinction to be made between responses to variables explicitly
recognized in the model and those due to more general changes in the trading environment.
Often the latter are minimally modelled as market penetration curves taking the form of a
sigmoid trend. Broadly this is the approach followed in the present paper; however, the
trend 'parameter' capturing ultimate market share at a fixed level of price
competitiveness is itself made a logistic function of the relative price variable
measuring such competitiveness.

The application of the model is to quarterly data on the share of imports in
Australian personal consumption over the 1980s and the first half of the 1990s. Most of
the signal relevant to price competition between domestic and imported consumer goods
occurred over the four years 1985-1988. This coincided with sizeable movements in the
real exchange rate; and therefore, presumably, with collinear movements in the prices of
the components within the domestic and the imported aggregates, which would be favourable
circumstances for the application of Hicks' composite commodity idea. The responses in
aggregate market shares during this episode suggest a very long-run Armington elasticity
in the range 3.4 to 4.8, with short-run (quarterly) values of 0.6 to 0.8.